Winners and Losers from Demographic Change
As we explored in previous editions of The Daily Reckoning Australia, demographic changes are already here, and the economic effects are emerging in real time. The demographic wave will take 30–50 years to play out, but it’s not too soon to begin asset allocations that will be profitable in the short run and robust to the long-term change.
Here are the key points to keep in mind when you do so:
1. The biggest loser will be China
The demographic collapse in China will be so great that it may actually destroy the credibility of the Communist Party of China, something the Chinese themselves describe as losing the Mandate of Heaven. This could lead to internal turmoil, or even breakaway provinces not unlike Taiwan today.
Tibet, Xinjiang, and parts of Manchuria have not historically been part of core Han China and may see the collapse of central authority as an opportunity to reassert their autonomy or even independence.
Conversely, Beijing will be aware of the trends described in this report and may seek to solidify its power with extreme acts such as an invasion of Taiwan.
The combination of geopolitical instability, excessive debt, reduced output, and weakening legitimacy will make China one of the least attractive destinations for capital over the coming decades.
2. The biggest winners will be the US, Canada, Nigeria, and India
The key to growth in all four countries is that they will be able to continue to drive growth even in a world of declining birth rates. The US and Canada will do this through immigration.
Nigeria’s birth rate is declining, but it is still sufficiently high (greater than 5.0) to maintain its population growth for decades to come. Nigeria will have the fourth-highest population in the world by 2050.
India’s birth rate is only 2.2 and declining, but it can still benefit from urbanisation, which is another way to increase economic growth even with little population growth.
All four countries are democracies, albeit with high corruption in Nigeria and oppressive bureaucracy in India. Democracy offers an outlet for popular discontent and flexibility in policy choices, which will ease the transition to a slow-growth world.
Australia and the UK may join this group of lucky countries because they also have pro-immigration policies that may allow populations to stabilise despite declining birth rates.
3. Japan and Europe will muddle through
The demographic outlook for Japan and Europe is not positive, but they have other strengths that will help them respond to the demographic collapse. Most importantly, they are already rich societies, despite slow growth and economic headwinds. China will become old before it becomes rich. Japan and Europe will become old also, but they are already rich.
The difference can best be understood with a simple example. Assume a country has 100 million people and a GDP of $5 trillion. That comes to per capita GDP of $50,000, a very rich country.
Now assume that the population declines 20% to 80 million people and GDP declines 10% to $4.5 trillion. The per capita GDP is now $56,250. Total GDP declined 10%, but per capita GDP increased 12.5%. People in the country are richer even though the country as a whole is poorer. The reason is that population fell faster than GDP, so there was more output per person.
Declining overall output is not good in general, and it is definitely a problem if you are trying to manage a huge nominal debt load, which most developed economies are. Still, it’s not automatically disastrous if the population is shrinking faster than the economy. The key is to use technology, AI, and natural resources in a way that increases the productivity of each worker even if the total number of workers declines.
This is easier said than done. Many developed economies are burdening themselves with high taxation, high debt loads, excessive regulation, and damaging green policies based on climate alarmism. Still, for countries that can avoid policy damage and make good use of technology, there is a way forward even with declining populations.
4. Latin America will underperform but not as badly as China
The major countries in Latin America are also experiencing sharply declining birth rates. Brazil is already well below the replacement rate (1.5), and Argentina is barely above (2.2), and the rate is declining.
None of the Latin American countries are particularly open to immigration as a substitute to indigenous births and none have achieved the high-income status that will provide relief for Japan and Europe. Decline in demand for agricultural output and natural resources as a result of global population decline will also be a headwind for economic growth.
Still, Latin America has several advantages that China does not possess. The region has relatively open capital accounts and relatively free trade. This will allow it to benefit from comparative advantages in input costs and unit labour costs. Most of the Latin American countries are also democracies, which are more robust to economic stress than autocratic and totalitarian regimes.
Brazil, in particular, has gone much further than China toward a consumer-driven economy. Mexico, Brazil, and Venezuela can all rely on hard currency from energy exports, which will still be in high demand even in a world of declining population. Growth will not cease, it will slow, and what growth there is will be energy-intensive.
Latin American will fall into the muddling-through category, albeit from a much lower base than Europe and Japan. Russia may resemble Latin America economically because of its ability to rely on natural resource exports despite internal population and productivity challenges.
Admittedly, these are high-level, long-term forecasts. Astute asset allocation will depend on more precise analyses of particular industries, companies, and sectors. There will be winners even in those economies most challenged (except for China, which has rule of law deficiencies and will have political turmoil in addition to the demographic challenges).
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Sectors that will perform well
Here are some particular sectors that will perform well despite smaller populations and lower overall growth rates:
• Energy. The energy sector including oil, natural gas, and renewables such as wind, solar, hydro, and nuclear will all do well over time. Energy use will rise exponentially, even in a world of slower growth. Renewables cannot grow fast enough to fill the gap, so the demand for oil and natural gas will continue to grow.
• Healthcare, elder care, and biomedical research will grow strongly along with an aging population. Even if overall population growth slows because of declining birth rates, the growth in the elderly population will continue for decades. Along with aging comes dementia, Alzheimer’s disease, and Parkinson’s disease, in addition to normal assisted living demands. Lower birth rates mean a smaller prime age cohort to care for the elderly. This will push technology, treatments, and assisted living to the forefront of elder care.
• Robotics and Artificial Intelligence. With a declining labour force and increased demand for labour from low productivity activities such as elder care, there will be an intense global search for productivity gains. The internet and mobile devices are ubiquitous and convenient, but it’s not clear that they do much to enhance productivity compared to earlier technologies such as catalogues and telephones. Online shopping may not matter if there are fewer shoppers. However, robotics and AI clearly enhance productivity to the point that they can substitute for labour instead of just increasing the output of labour. Robotics and AI will be the critical bridge between shrinking labour forces and the need for growth.
• Gold will be indispensable to sound portfolios. A future of declining output and higher wages is a recipe for inflation. That particular combination was labelled stagflation in the late 1970s. Actual economic stagnation will depend on the ability to harness energy and technology to improve productivity. Yet, inflation is a near certainty both because of higher wages and also because of the need for countries to reduce the real cost of enormous debt burdens. Money itself may become a cloudy concept due to the rise of cryptocurrencies, central bank digital currencies, and non-bank payment channels. Investors will search for a reliable store of value with an unquestioned history as money. Gold will fill the bill.
Demographic collapse is inevitable; it’s already baked into existing birth rates and likely trends. Still, it’s not the end of the world. It won’t even be the end of humanity. But it will be the end of an economic paradigm of higher growth, higher consumption, and higher output that has prevailed for the past 200 years.
The new paradigm will consist of fewer people in larger cities — an unprecedented form of urbanisation beyond what we know already. Legacy industries such as automobiles will fall by the wayside. Healthcare generally and elder care in particular will boom. There will be no shortage of investment opportunities. Yet, investors will need to avoid many traditional investments that have performed well in the past but will have little or no role in an aging and highly-urbanised future.
Until next week,
Strategist, The Daily Reckoning Australia
PS: This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events.